The government has just put in the public domain the report of a high-level committee tasked with reviewing the Fiscal Responsibility and Budget Management (FRBM) law of 2003. The panel has suggested a roadmap for India’s fiscal deficit to reach 2.5% of GDP by 2023 which includes a new law and a new approach for attaining macro-economic stability that not only focuses on the fiscal deficit, but also the total amount of debt the country takes on. Finance Minister Arun Jaitley, who got the report a week before he presented this year’s Budget, has set a fiscal deficit target of 3.2% of GDP for 2017-18 as opposed to the committee’s recommendation of 3%. But he has committed to accept that deficit level for the years 2018-19 and 2019-20.
Sounds very technical. Should you be bothered?
Yes. All government spending — be it to build highways or pay off outstanding loans of farmers — are financed by the taxpayer and disproportionately so in India, thanks to its low taxpayer base. Excessive spending and unchecked borrowing by governments to please the electorate not only poses the risk that of higher taxes in future while cramping essential public spending by future governments on the next generation. In recent decades, such reckless spending has got the country into a tight spot, including the brink of default in 1991 — when the economy was perforce opened up. A side effect of such spending — investments and new jobs creation slow down too.
Why didn’t the existing law work?
When the lessons of 1991 were forgotten by the late ’90s, the Atal Behari Vajpayee government introduced a law to bring down the level of fiscal deficit as a proportion of GDP to 3% by 2009 from the 10% level it had reached. However, when the global financial crisis of 2008 erupted, the target was lost sight of as the government opted to spend its way out of trouble. Though the law was amended to meet the 3% target by March 2018, the present government is aiming for a 3.2 % deficit by then – perhaps to offset the adverse impacts of demonetisation.
How will the new approach make a difference?
Apart from specifying fiscal and revenue deficit targets for each year up to 2022-23, the committee has suggested a new Debt and Fiscal Responsibility law and a focus on the overall government debt (including states’ debt) level – which should be 60% of GDP by 2023 from 68% now. More importantly, it has proposed the creation of a new Fiscal Council that must be consulted any time the government wants to deviate from debt targets. Such deviations, it has said, should only be allowed by invoking an escape clause with pre-set triggers that include events such as an act of war, national disasters, a collapse of the farm sector and far-reaching structural reforms with unanticipated fiscal implications. The question is whether the government would bind itself to such discipline.
